Only time will tell what type of regulations will be effective on the fee front, but the CFPB is not yet tackling the fraud front. While a consumer may have recourse for some frauds if they use their Debit or Credit Cards under the Truth in Lending Act or the Electronic Funds Transfer Act, victim of prepaid card fraud have little protections outside of criminal law. While most of these losses are small in nature, some victims have lost substantial amounts of money through alleged tax collection, bill collection and lottery schemes. While it never hurts to be informed, particularly when your money is involved, pure public awareness of fraud is not likely to protect vulnerable consumers. Sometimes disclosure alone is insufficient. Perhaps its time for the regulators to more aggressively pursue the card issuers?

Thursday, September 25, 2014

In case there were any doubts, the federal government is still in the business of Truth-In-Lending. Corinthian College is the target of an action of the Consumer Financial Protection Bureau “(CFPB”) for predatory student loan practices. This is not too surprising given the Massachusetts Attorney General action filed back in April against Corinthian. Corinthian has a host of troubles now, including financial problems that have it seeking a buyer for the distressed educational institution. (See, The For Profit College that's Too Big to Fail and Corinthian Victimized Students) The CFPB's complaint alleges that Corinthian encouraged students to take out private loans, in addition to federal loans, too expensive to pay back. The CFPB points to inflated, misleading and sometimes false employment figures. Its a bit of a mystery as to whether the college was just encouraging students to take out these private loans or if the practices actually amounted to inducing students to take out these loans.

The cost of tuition for one of Corinthian Colleges degrees was at least five times higher for any degree that could be earned at a public or community college. The CFPB alleges that Corinthian raised the cost of tuition so that the federal loans would not cover the cost, and students would then take out "Genesis" loans, which Corinthian had an interest in and which require students to pay while attending classes. Many of the students defaulted and Corinthian employees would called students out of class numerous times to discuss the non-payment of the loan in order to get students to make good on their loans.

So, how might an aggrieved student with some education, but not fantastic job opportunities benefit from this action? The CFPB's complaint seeks relief from the court going as far as ordering the complete recision of all Genesis and Education Plus loans starting from as early as 2011. This is big, as the students would not have to repay these loans. About 130,000 students took out a “Genesis” loan since July 2011. Apparently most of the students attending Corinthian Colleges which include Everest Institute and Everest College, are students that come from homes earning less than 45k per year. The College is however, still enrolling students with the same practices despite the suit although the CFPB is seeking to enjoin the colleges from performing the same tactics for new or prospective students. In August, Corinthian sold over $500 million of these student loans to a third party for $19 million, surely reflecting collectability on several fronts.

With the federal government unable to tackle the issue of student loans on a broad basis, the CFPB at least seems to be carrying out there promise to crack down on predatory lending. Earlier this year, it was ITT Tech that was in the spot light for these deceptive practices. (See, CFPB Takes on Predatory Student Loan Practices). Student loan defaults on the whole, at least, are down. (See, Defaults on Student Loans Decline). It should be interesting to keep an eye on who is next on the student loan front. Those lenders and schools whose loans have a disparate impact on their students are next in line. Not surprisingly, the ABA's Business Law Section's Annual Meeting included a well attended session on "All I Need to Know I Learned From the Government: A Look at the Regulatory and Enforcement Landscape for Student Lending."

Law students learn early in their study of Contracts that an aggrieved party is entitled to collect its expectation interest. But, is that always true? Well, the Supreme Court of Oregon recently held that an aggrieved seller under Article 2 might be able to claim more than its expectation interest.

The breadth of the remedies available to a seller who has resold goods after a buyer’s breach was at issue in the case of Peace River Seed Co-Operative, Limited v. Proseeds Marketing, Incorporated. Proseeds Marketing (“Proseeds”) was to purchase seeds from Peace River Seed Co-Operative (“Peace River”) at a fixed price over a period of two years. During the contract period, the price of grass seeds fell dramatically and Proseeds refused to provide shipping and delivery confirmation to Peace River for the shipment of the seeds. Therefore, Peace River cancelled the contracts and brought suit, claiming market price damages even though it had resold some of the seed.

Ultimately at issue was whether an aggrieved seller who resold goods (section 2-706) can recover the difference between the unpaid contract price and the market price, even where the market price damages would exceed resale damages actually suffered by the seller. If Peace River could collect market price damages even where it resold the goods at a profit, it would arguably receive a windfall on the transaction. Conversely, the court could restrict Peace River to recovery of an amount of damages no greater than it recovered in its resale. Somewhat surprisingly, the Supreme Court of Oregon held that owing to the lack of clarity in the Code itself, “the text, context, and legislative history of the sellers’ remedies provisions support a seller’s right to recover either market price damages or resale price damages, even if market price damages lead to a larger recovery.” The court reasoned that the index of remedies provided by section 2-703, coupled with the comments rejecting election of remedies, indicated that a seller could resell at a higher price and still collect a larger market-based remedy where available.

Despite the decision in Peace River, a seller who attempts to claim the higher remedy under 2-708 after resale should expect a challenge from the buyer. While the decision in Peace River is based on the Code’s rejection of an election of remedies and the “liberal” administration of remedies, it does not necessarily follow that an aggrieved seller should be able to collect more than its expectation interest. In such a case, it seems the seller should not have been able to obtain more than the benefit of the bargain. One must also question whether the Court might have concluded that the resale price and market were equivalent. But this may not be the case in a rapidly changing market. Moreover, while the Code rejects election of remedies, it also provides that “[w]hether the pursuit of one remedy bars another depends entirely on the facts of the individual case.” It might be argued that the pursuit of the market-based remedy when it exceeds the benefit-of-the-bargain, would entirely be the appropriate circumstance in which to bar the election of the higher remedy.

Friday, September 12, 2014

I am at the ABA Business Law Section's first stand-alone meetings in Chicago, Illinois and attended the filing office task force this morning. Among other news about states encouraging electronic filings of financing statements, the case of Fjellin v. Penning was on the agenda. In this case, a trust was a perfected secured party relative to assets of several Dairy Queen stores that were later sold to a buyer. After the closing, the debtors' attorney, Kaplan, filed a termination statement relative to the assets sold to the buyer (who had bought the assets free and clear of the liens). Penning, a secured creditor of the Trust himself, as well as a director and shareholder of the debtor, allegedly retained most of the closing funds and only paid part of them over to the Trust. In the action against Kaplan, the court concluded that there was no claim under section 9-625, which only creates a cause of against secured parties. Kaplan, being the attorney of the debtor, was not a secured party. Moreover, the court declined to find in favor of the Trust on a claim of negligence against Kaplan, finding: (i) causation lacking where Penning's action in taking the funds caused the problem, (ii) that the termination statement did not extinguish the security interest in the assets under 9-315; and the Trust had an interest in proceeds under section 9-203.

Wednesday, September 10, 2014

The Tenth International Conference on Contracts will be held February 27-28th, 2015 at the University of Nevada, Las Vegas. The Chair is Professor Keith Rowley. More will be coming soon on this, but going to Vegas for the Conference has been a big hit in the past (UNLV has hosted before).

Tuesday, April 29, 2014

Interest in cryptocurrencies is growing, even after Mt. Gox, formerly the largest international Bitcoin exchange, filed for bankruptcy in Japan following $473 million in losses (See also, Almost Half a Billion Vanishes). Bitcoin’s resulting drop in value, from a $1,000 high to around $500, should be a reminder that cryptocurrencies are volatile payment systems under which the applicability of existing regulatory and commercial law is unclear.

Bitcoin Regulation
Because Bitcoin is not backed by any government or central bank, banking and financial industry regulations may not apply to Bitcoin transactions. For this reason, Federal Reserve Chair Janet Yellen testified before Senate that the Federal Reserve lacks regulatory authority over Bitcoin. Similarly, the FDIC indicated in at least one context that a money transmitter like PayPal is not a bank for federal banking law purposes. Consequently, Bitcoin users cannot expect deposit or investment protection from the FDIC or customer protection from the SIPC.

Given this uncertainty, the Federal Trade Commission, Consumer Financial Protection Bureau, Securities and Exchange Commission, and Commodity Futures Trading Commission are studying the need for cryptocurrency regulation. Additionally, New York and California are racing to pass state regulations.

Notwithstanding, it appears Bitcoin exchanges may be subject to money-laundering rules under the Bank Secrecy Act. The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) previously stated that exchanges must register with FinCEN as money services businesses and report large or suspicious transactions. This is not surprising given the anonymous and irreversible nature of Bitcoin transactions, which make them susceptible to money laundering and other criminal activity. For these reasons, it is unclear how Bitcoin exchanges can fully comply with reporting requirements.

Bitcoin Under Existing Commercial Law
It is equally uncertain how Bitcoin transactions are treated under existing commercial laws not designed to address cryptocurrency concerns. Because Bitcoin is intangible, yet acts as a store of value and a financial medium for the exchange of goods and services, it is difficult to classify as a property type. Under non-bankruptcy law, bitcoins are likely a “general intangible” or “payment intangible” for purposes of Article 9 of the Uniform Commercial Code (UCC), as adopted in most jurisdictions. Consequently, a creditor taking bitcoin as collateral should obtain a security agreement from the debtor sufficiently identifying the collateral. Perfection of the security interest would require filing a UCC-1 financing statement in the state where the debtor is located. Failure to perfect may render the creditor’s security interest subject to avoidance by a subsequently appointed bankruptcy trustee. Interestingly, because secured lenders sometimes take blanket security interests in all of a debtor’s property, including general intangibles, many banks and financial institutions may already hold security interests in a debtor’s bitcoins without realizing it.

At least one commentator has also indicated that, because Bitcoin exchanges may not constitute banks, bitcoin held by an exchange would not qualify as a “deposit account” under the UCC, but rather as a “payment intangible.” Thus, perfection in a debtor’s cryptocurrency held on an exchange cannot be accomplished by an account control agreement typically used to perfect against deposit accounts. As a result, when a debtor transacting business through a Bitcoin exchange defaults, it may be harder for secured creditors to liquidate their collateral.

Given Bitcoin’s inherent volatility, and the difficulty secured creditors may face collecting against it, Bitcoin’s use as collateral in conventional lending transactions remains highly suspect. For these reasons, cautious lenders should consider including representations and covenants in lending agreements to prohibit or limit a borrower’s use of Bitcoin.

In bankruptcy, a debtor’s bitcoin at filing would likely qualify as property of the estate since the debtor would have a legal or equitable interest therein. Accordingly, a bankruptcy trustee should be able to assert control over a debtor’s bitcoins (or their value) and liquidate them for the estate’s benefit. A debtor’s failure to schedule or adequately explain the absence of previously held bitcoins, or turn over existing bitcoins to the trustee, could provide grounds to object to the debtor’s discharge. A debtor’s pre-bankruptcy transfers of bitcoins may provide grounds for a trustee to pursue preference or fraudulent conveyance actions against bitcoin recipients. However, identifying the recipients may be complicated by Bitcoin’s anonymity. Regardless, prudent trustees should inquire about a debtor’s existing or past Bitcoin investments or transactions. See, The Hazards of Lending to Bitcoin Users.

Increased awareness of Bitcoin’s potential security pitfalls highlights the uncertainties surrounding cryptocurrency’s future. Going forward, legislation and case law will likely provide more clarity on existing commercial law and regulatory concerns. Until then, parties transacting business with or investing in Bitcoin should exercise caution. See, Is UCC Article 9 the Achilles Heel of Bitcoin?

Friday, April 25, 2014

Now that most states have adopted the 2010 Amendments to Article 9, a new copy of the ABA's Portable UCC (5th edition) might be helpful, if you've not already seen it. In other interesting new reads:

1. The CISG as Soft Law & Choice of Law: Gōjū Ryū? (Lisa Spagnolo).
2. UCC Suvey - Sales (Jennifer Martin). Highlighting cases from 2013 decided under Article 2 of the Uniform Commercial Code. Particular Article 2 highlights include the mixed goods case of Whitecap Investment Corp. v. Putnam Lumber & Export Co., a case involving multiple transactions for treated lumber where the court found that application of the “predominant purpose” test to determine whether Article 2, or common law, applies to disputes is dependent upon whether the parties have an overriding agreement for the transactions or whether the court evaluates each individual transaction on its own. The Sales Survey also took up the merchants must read their mail case of Brooks Peanut Co., Inc. v. Great Southern Peanut, LLC., a case involving peanut brokers and communications among the parties and their brokers.
3. The Uniform Commercial Code Survey: Letters of Credit (James Barnes & James Byrne). This survey concentrates on the most significant letter of credit ("LC") issues addressed in cases decided in the United States in the year 2012.
4. The Incoherent Role of Bargaining Power in Contract Law (Max Helveston & Michael Jacobs).

Wednesday, April 2, 2014

The dumbest personal finance decision people make is . . . getting into debt. See, CNN, Money. Many won't admit to any mistakes at all, but as the chart below indicates, there are plenty of us that do own up to personal finance mistakes.

The Survey also covers other great points, like living within your means as a success strategy, but the most surprising point to me is that people feel rich if they have $500,000 (I would expect that to be higher). Happily, the survey indicates that we've passed the point where people are overly worried about their homes declining in value for the most part. This is probably a change from a couple of years ago.

The biggest obstacle to financial security: income (31%). I'm not sure that I agree with that, given some of the other survey results. If you follow the other pages, it would seem that not getting into debt and living within one's means might be key players here, so long as the income is not too meager. But, once there is debt and lifestyle challenges, a low income can become that obstacle.

CNN ran a survey back in 2011 that found that half of Americans did not have $2000 in emergency savings. This new survey concludes that almost two-thirds could handle a $1000 emergency, but only 42% could handle a $10,000 emergency. It seems we still have a way to go as Americans when it comes to saving.

Tuesday, April 1, 2014

What? Amend UCC Article 2? You might think I am joking, as it is April Fool's Day. But, indeed, I am not. We've successfully amended UCC Article 9 a number of times in recent time. Why not UCC Article 2? Yes, the last attempt at this feat lasted a long time and ultimately failed. There are many reasons why the Article 2 Amendments failed, though. See Symposium on Revised Article 1 and Proposed Revised Article 2, 54 Southern Methodist Law Review 469 (2001). The fact remains that Article 2 is still cumbersome, disorganized and plain out difficult to follow. Might a smaller revision of the type used with Article 9 have success in an Article 2 revision?

As Professor Neil Cohen, Brooklyn Law, commented at the International Conference on Contracts KCON9, a code should be written in a comprehensive, systematic, and preemptive manner. Professor Cohen observed that Professor Linda Rusch's work on revising the remedies portion of Article 2 accomplished the goals of a good code and had much to commend them. Professor Larry Garvin (Ohio State) concurred with much of what was said, particularly with the clarity, simplicity and power of the language of the draft remedies provisions. Here's the video from the Plenary Session at KCON9.

So, despite this being April 1, perhaps sometime in the future when we all are sufficiently recovered from the trauma of having a failed Article 2 revision in the first place, we might consider moving toward a modest revision centered on some of the work that held a greater consensus. Remedies anyone?

I am pleased to report that all of the video from KCON9 held at St. Thomas University School of Law February 2014 is now available at youtube (Click here to access the Channel). Some of the highlights of the program included:

The Works of Linda J. Rusch

Contracts and Commercial Dealings

Contracts and Technology

Wrap Contracts by Nancy Kim

Contract Law and Social Justice: An Oxymoron?

Behavior, Bargaining, Incentives and Contract

Contract and Its Relationship to Other Doctrines

International Issues in Contracting

If you missed the Conference, next year is at University of Nevada, Las Vegas. Professor Keith Rowley is the Chair.

But, about three years ago, I said much the same thing, commenting there are "no quick fixes or easy roads to avoid market volatility and economic instability." See, What is a Bitcoin? Where Did My Bitcoin Go? I see Bitcoin much in the way that Buffett does, basically it is a way to transmit money. It is not a currency of the sort that we expect to be backed by government. The IRS has come out explicitly and classified the Bitcoin as not a currency, but property. See IRS: Virtual Currency Guidance.

If investors expect to make money investing in Bitcoin, there would be costs on the users of the system, much in the way that the credit and debit card system works. But, I have more confidence that losses arising under the debit and credit card system are not ordinarily borne by the consumer. Moreover, those investing in the Bitcoin system expecting their investment to rise would be wise to remember that any investment is speculation. It is reminiscent to me of Gordon Gecko's reminder in Wall Street: Money Never Sleeps:

Back in the 1600s, the Dutch, they got speculation fever to the point that you could buy a beautiful house on a canal in Amsterdam for the price of one bulb. They called it 'Tulip Mania.' Then it collapsed. You could buy 10 bulbs for two dollars. People got wiped out, but who remembers?

But, I seem to recall a whole lot of people recently losing money on Bitcoin. See, Bitcoin's Mt. Gox Goes Offline. Perhaps my memory is starting to fade with old age.

Tuesday, March 25, 2014

Its the time of the year for the ABA's Sales Survey that will come out by August. Each year, there are noteworthy cases involving the scope of Article 2. Deciding whether Article 2 of the U.C.C. applies, of course, rests on whether the transaction involves a sale of goods under 2-105. In many cases this determination is pretty straightforward, but is complicated when there the transaction is one with mixed goods and services. In such cases, most courts employ the predominate purpose test to see whether the goods or services aspect of the transaction eclipses the other. See, Predominate Purpose Test Still Predominates. This inquiry is more complicated, though, when the dealings of the parties involves multiple transactions.

Such was the case in Whitecap Investment Corp. v. Putnam Lumber & Export Company, where the District Court for the Virgin Islands considered whether certain transactions involving lumber were sales of goods. Great Southern Wood Preserving, Inc. (“GSWP”) and Putnam Lumber & Export Company (“Putnam”) contracted for the treatment of lumber by GSWP, which Putnam would resell to others, including Whitecap Investment Corp. (“Whitecap”). As there was no overriding contract, GSWP and Putnam would enter into each transaction independently, with GSWP providing treatment services only in nearly all cases. Putnam would purchase wood and provide it to GSWP for treatment in accord with the customer’s specifications. In some transactions, GSWP would also sell to Putnam its own lumber, treated according to industry specifications. Following a dispute over the premature decay of the lumber, Whitecap filed suit against Putnam for breach of contract and breach of warranty, and Putnam filed a cross–claim against GSWP for indemnity and contribution. On GSWP’s motion for summary judgment, it argued that it was entitled to summary judgment on any breach of warranty claim that arose under Article 2 because GSWP claimed it sold no goods to Putnam. The court denied the motion, holding that since the parties did not have one overriding agreement, the court would need to examine each transaction separately to determine if the sale of goods predominated. As some of the contracts did involve the sale of lumber governed by Article 2, summary judgment was improper.

The lesson of this case is that the structuring of the parties overall arrangement can make a difference in coverage by Article 2 in mixed goods/sales transactions. Surely, those transactions that involved only sales of treated lumber would be sales of goods for purposes of Article 2. It would seem on the facts at summary judgment that the other transactions that involved lumber treatment only would not be transactions in goods under Article 2. Viewing the transactions independently is more time consuming from a fact perspective and may lead to a different outcome on than if the parties had one overriding contract under which there were isolated sales, but predominantly treatment services contemplated and delivered by the provider.

pressuring students into high interest loans without
affording them the opportunity to understand their loan obligations;

offering credits that are non-transferable to community or non-profit colleges;

misleading students into thinking that they would be securing gainful
employment after graduation in order to payoff their private loans; and

knowing
that a majority of the students would default on their private loans.

Apparently, the Securities and Exchange Commission ("SEC") is also looking into the practices of ITT and some of the state attorney generals are also investigating its practices. See, WSJ Online. Investigation into ITT is hopefully just the beginning into the lending practices involving students. It is not unusual that students have very high
student loan balances that take a long time to pay or they struggle with at
times.This is especially true for
graduates who are unemployed or underemployed. See, American Student Assistance, Student Loan Debt Statistics. Yet, the protections afforded to borrowers under the Credit Card Responsibility and Disclosure Act ("CARD Act") in terms of account statement disclosures and loan transparency were not extended to student borrowers. This is true in the face of complaints from consumers about receiving account statements and documentation upon request. Moreover, students do not get regular billing statements while they are in school since they are not in repayment. The same strong tabular disclosure that is the gold standard in other areas surely should apply in the student arena. Plenty of fodder for the CFPB to tackle.

Tuesday, March 18, 2014

In a news story that looks like it should be reported in a law school casebook, a Detroit woman died in her home, yet her bank continued to pay the automatic payments from her account until the money ran out. Then came a foreclosure on her home. All of this occurred over a period of about six years.

A few points worthy of discussion beyond the obvious problem that her family and friends were not able to discover her death. First, is that the perpetual nature of recurring payments may result in payments to creditors proceeding even after death. In terms of the basic assent and authorization of the payments from the account under U.C.C. 4-401, it would seem to be a valid question whether she continued to "authorize" these payments under the properly payable rule after death. Second, a contractor discovered the death after authorities foreclosed on the house due to non-payment of taxes. One of the lingering issues with foreclosures is the access to the property available to buyers, contractors and even governmental agents. One might wonder how the foreclosure possibly proceeded without any response from her or suspicion as to the reality of her demise.

Video from the proceedings the of the International Conference on Contracts are now available in case you miss the conference this year. One of the more interesting presentations was the planetary session where Kingsley Martin of KM Standards spoke about how technology will change the way that lawyers practice as it allows for the emergence of contracts standards in a variety of key agreements that attorneys use. Kingsley used the analogy of physicians using MRI machine to show how the work of attorneys will also be aided through technological developments. I agree with him that technological advances in the law are going to continue to impact the practice. Not only does this have the possibility of making agreements better for clients, but should also increase the availability of legal services in the contract area to a greater number of clients. I will be looking forward to seeing how his product ultimately changes the way my students will draft a variety of contracts for clients.

Saturday, January 4, 2014

I am quite pleased to have widespread participation for the
upcoming conference on contracts to be held at St. Thomas University in Miami
Lakes, Florida. Registration is open on the conference website at www.contractsconference.com. All
conference participants, speakers and moderators are required to register for
the conference to help defer the costs of meals, shuttles and the like.

Please be aware that the group rate for the hotels must be
reserved by January 14, 2014. Hotels in South Florida in February can be
pricey, but the conference rate is quite good, so you’ll want to make sure that
you reserve early. The conference hotels are Shula's Hotel and Golf Club and
the Newport Beachside Resort. There is also a deal for rental cars through
enterprise if you are interested. Information on hotel reservation is available
on the conference website under the hotels tab. While the conference shuttle is
running from Shula’s to the law school, I will look into running a second
shuttle to the Newport Beachside resort if there were a substantial number of
conference participants staying there. The Newport is a little further from the
law school, but as the name connotes, is on the beach.

I look forward to seeing you all in February and will be
sending additional information about panels and scheduling out in the near
future. If you are not presenting and just want a good conference to attend,
the contracts conference has much to offer in terms of topics that will be
discussed. I will be posting the program to the list in the near future
to give any of you who are on the fence about attending even more incentive.